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Thursday, 14 July 2011

Notion: From HDD to Camera

Read this news yesterday: Nikon Malaysia aims to increase its revenue by over 40% this year.

Nikon's market share for DSLR cameras and compact digital cameras stands at 49% and 16% respectively. It sells more DSLR cameras than any other brands in Malaysia, and DSLR camera is getting more and more popular.

From this news, straight away my focus is shifted to Notion Vtec. Nikon has 9% share in Notion Vtec since January 2010.

Notion Vtec supplies parts for 2.5-inch hard disc drive (HDD), digital camera and automobile/industrial segment. Those who follow its share movement will know that Notion has a very hard time indeed for the past 1-2 years. Its share price tumbled from a high of RM3.50 in January 2010 to a low of RM1.50, with a drop of almost 60%. Currently it is trading at slightly above RM2.00. Is it a good company? Is it a bargain?

Lets look at Notion's net profit for the past few quarters.

PAT RM mil

Q1

Q2

Q3

Q4

2009

7

5

11

13

2010

14

12

3

8

2011

13

11

Notion's net profit fell from RM12mil in 2010Q2 to RM3mil in 2010Q3. However, we can see a speedy recovery afterwards.

Now lets see Notion's yearly financial performance.

RM mil

Revenue

Net Profit

2006

90

24

2007

105

26

2008

146

33

2009

173

36

2010

227

37

The revenue and net profit increase steadily since 2006, even with low-earning quarters in 2010.

What were the problems Notion actually face in year 2010? There are a few that seriously challenge the management team.

The main challenges are: weak USD, sluggish HDD market due to the popularity of ipad/tablet and higher than expected start up cost for its new production lines. The massive drop in 2010Q3's profit is because of some quality problem in its products which were rejected. However, this technical issue was promptly solved. Currently Notion still face unfavorable situation in USD and HDD market. However, good news started to flow in in 2011.

Seeing the unpredictable future of HDD, Notion successfully shifted its main business from HDD to camera segment. In year end 2010, HDD and camera contribution is tied at 44%. After Q2 2011, HDD and camera segment contribute 38% and 45% respectively to its revenue.

In early 2011, Notion secured a new camera sub-assembly job from Nikon. According to a research report from ECM Libra , Notion Vtec would initially start to produce 5,000 pieces per month in April, which would gradually be ramped up to 30,000 pieces per month from October onwards. The research house stated that on a full-year basis, this job was estimated to enhance financial year 2012 revenue and net profits by RM111 million and RM10 million respectively.

There were opportunities for Notion to garner more sub-assembly jobs from Nikon in the future, as 30,000 pieces per month represented only 10 per cent of the total sub-assembly jobs done by Nikon’s Thailand plant currently, which could be outsourced to Notion Vtec eventually.

Then after Japan's Sendai's earthquake in March 2011, Nikon terminated its production facilities there. A week later, Nikon announced that it will move its body mount production to Notion in Klang with immediate effect. This could generate a revenue of RM36-60mil a year for Notion.

Besides, Notion set up an aluminium scrap plant in Ijok, Kuala Selangor for the purpose of smelting aluminium scrap into aluminium ingots for own use as well as for sales to other customers. It could generate revenue and profit of RM25mil and RM3.7mil per year respectively. The operation should have started in May this year. Notion is also expanding its Thai plant and expecting more revenue from it later.

For HDD segment, orders from Samsung of late had surprised on the upside with 900,000 pieces per month (p.m) of 2.5-inch base plates to commence by April this year from the initial production of 250,000 pieces p.m.

Notion is currently applying for MSC status company. If successful, it can save RM8-10mil of tax for up to 5 years.

Notion does not only supply camera parts to Nikon, but also to Canon and Sony as well.

Notion's Target Price 2011

Target price

ECMLibra

2.50

Maybank

2.40

OSK

2.12

HWANGDBS

2.50

RHB

2.17

It is a risk to invest in a HDD-related company at the moment. However, Notion's management is confident that it can achieve yet another record year in 2011, with the target revenue set at RM280mil. The half year revenue so far stands at RM114mil. Though not even half of the target, I think this target is still achievable, base on all the positive news above.